I recommend you read this first if you haven't already as it explains all about different resource folders: http://developer.android.com/guide/topics/resources/providing-resources.html
The most important fact is that it's all just about the name of the folder, so yes you could create the folder manually if you wanted to just following the naming scheme used in the article I gave you. However since you seem to be using android studio I'll show you how you can do it there since it has some built-in functionality for it.
Also yes, android will automatically get the right resource for you. If you have multiple different my_circle.png files in different folders with different constraints, R.drawable.my_circle with only return the image in the folder that matches the current device specifications. The exact algorithm it uses to select the resource is in the article.
First with any layout open you can click the top left button in the editor to change what layout you want to be working on as well as create new layouts.
Here is the "folder maker". You can select any constraint on the layout on the left, like if you what the layout only to be used if the user has a certain screen size, screen density, language, etc. Just add the ones you want and notice that it changes the directory name to match.
Now your new layout is available on the left. In the android view, the folder name of the layout/resource is in is given in parenthesis. If you do it this way android will automatically make a layout XML file for you, instead of just creating a folder and copying it over like you mentioned.
However it's still in it's own folder if you change to the project files view. This shows how the res folders/files are actually stored.
To create something similar for images or other resources, just right-click the res-folder and create a new android resource directory. You'll be presented with the same "folder maker" as before except that's it's no longer locked on type layout and you have to change the type yourself to e.g. drawable or whatever resource type you are adding. This will then create a drawable folder with the correct name for you to drag-and-drop your images into.
Here I created a folder using a size constraint of normal. Your may have to be in e.g. the project files view to be able to drag over files as the folder wouldn't show up in the typical android view. If you wonder how to change view, just click the drop-down on the top of the image.
Remember to always include a default resource folder, one with no constraints. Otherwise your app will crash when the constraint aren't met.